Econ 1000 Chapter 2

goods and services

outputs of the production process, such as food, clothing, shelter, healthcare, education, and entertainment

factors of production

inputs in the production process, broadly categorized as land, labor, and capital

production

the process by which inputs (factors of production) are transformed into an output (a good or service)

households

the decision making entities whose primary objective is to obtain benefits from consuming goods and services

firms

the decision making entities whose primary role is to produce goods and services for consumption by households

three fundamental economic questions

what to produce? (production decision), how to produce it? (resource use decision), and for whom to produce it? (distributional decision)

production decision

of all the different combinations of goods and services that we could produce, what specific combination will we produce?

resource use decision

which productive resources will be used to produce which goods and services?

distributional decision

who gets to consume the goods and services that we have chosen to produce?

production possibilities frontier

an economic model that graphs the maximum possible combinations of two goods an economy can produce when all resources are fully and efficiently utilized

attainable output combination

a combination of goods that can possibly be produced by a society with its available resources and technology (combinations are on or below the PPF)

unattainable output combination

a combination of goods that CANNOT possibly be produced by a society with its available productive resources and technology (combinations are beyond the PPF)

productive efficiency

a situation in which it is NOT possible to increase the amount produced of any good, without decreasing the amount produced of some other good (combination of outputs on the PPF)

productive inefficiency

a situation in which it is possible to increase the amount produced of some good, without decreasing the amount produced of any other good (combination of outputs below the PPF)

absolute advantage

a producer has an absolute advantage in the production of a good if they can produce more output than another producer using the same amount of inputs

opportunity cost

the cost of giving up the best alternative that must be foregone in order to do or acquire something; measures the value of the next best use of the resources used to undertake the activity being considered

comparative advantage

a producer has a comparative advantage in the production of a good if their opportunity cost of producing the good is lower than the opportunity cost of another worker for producing the same good

law of comparative advantage

an economy should, on average, export goods with low self-sufficiency prices and import goods with high self-sufficiency prices